July 9, 2010 / 8:26 PM / 10 years ago

UPDATE 1-RBS shops Kondaur bonds backed by sour US mortgages

(Adds background, investor comments)

By Al Yoon

NEW YORK, July 9 (Reuters) - RBS Securities is seeking bids for a mortgage bond deal backed by distressed U.S. home loans, the second such deal this year as Wall Street feeds investor appetite for riskier debt.

RBS will price $79.1 million in bonds backed by $264 million in delinquent mortgages held by Kondaur Capital Corp, one of the largest buyers of U.S. non-performing loans, according to a term sheet obtained by Reuters.

Most of the loans are already in foreclosure, but the liquidation value of the homes supports the bonds.

The offering follows a sale by Citigroup for private equity firm Lone Star Funds and signals more to come as dealers seek to satisfy investor demand and keep their securitization mills greased. Even so, these are mostly niche deals, with dealers feverishly trying to rebuild a market that will support new lending.

“For banks anxious to earn fees for structuring a new loan offering in what has been a mostly non-existent market, and for investors who can assess what might constitute an adequate risk-adjusted return, the deal can make sense,” said Chris Sullivan, chief investment officer at the United Nations Federal Credit Union in New York.

The private residential mortgage-backed securities (RMBS) market is seen as crucial to expand credit for U.S. homeowners and wean Americans from the government support offered through guarantees of Fannie Mae, Freddie Mac and the Federal Housing Administration. Private mortgage bond volume in the trillions of dollars once exceeded that of the guaranteed markets, but both markets were brought down by shoddy loans that helped trigger the worst housing slump since the 1930s.

Lawmakers aim to strengthen the quality of securitizations via financial regulation reform legislation. Dealers warn that some terms, including forcing issuers to retain at least 5 percent of notes offered, will hinder credit offered to homeowners.

Hopes for a revived securitization market rose in April as Redwood Trust (RWT.N), a California real estate investment firm, sold a $222.4 million mortgage bond backed by new loans, the first of its kind in two years. But a slight pullback in prices since then has dampened efforts, as Redwood’s deal was seen on the edge of profitability for issuers that buy new loans at face value.

Delinquent loans are typically purchased in the secondary market at 40 to 60 cents on the dollar, based on the expected recovery from property sales.

Overall, demand for RMBS has grown as investors have become more comfortable estimating losses associated with the loans. As the European sovereign debt crisis fueled a wide-scale risk reduction by investors in May and June, prices on some of the riskiest RMBS fell just 1 point from their highest since July 2008, according to Amherst Securities Group.

“A lot of people view this sector as a very low risk sector because a lot of the bad news is priced into it already,” said Philip Barach, co-manager of the DoubleLine Total Return Bond Fund (DBLTX.O) in Los Angeles. “It’s unlike the high-yield (corporate bond) market, where expectations now are for low defaults.”

Delinquent loans may provide more collateral for RMBS as trading increases in the secondary market, according to one banker. Banks this year have boosted sales of troubled loans and buyers such as hedge funds are looking to finance more purchases by securitizing current holdings, the banker said.

The loans in the RBS deal, Kondaur Mortgage Asset Trust 2010-NPL1, were originated by HSBC Bank. Some had “missing or defective” disclosures, but that information was considered not material, according to the term sheet.

Bonds offered have a 55 percent cushion against loss, with the top parts sold at coupons of 5 percent to 11 percent.

An RBS banker and Jon Daurio, chief executive officer of Kondaur, both declined to confirm the deal.

In March, Daurio said Kondaur’s practice of paying delinquent homeowners for the deeds to their house results in speedy resale of the properties. He said this practice maximizes profit over lengthy foreclosures, or if the loan is modified. (Editing by Dan Grebler)

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